United States v. Cavin

UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

No. 93-3643

UNITED STATES OF AMERICA,
Plaintiff-Appellee/
Cross-Appellant,

versus

JOHN E. SEAGO, GEORGE C. CAVIN,
and GERALD J. DAIGLE, JR.,
Defendants-Appellants,

JOHN E. SEAGO and GERALD J. DAIGLE, JR.,
Defendants-Appellants/
Cross-Appellees.

Appeals from the United States District Court
for the Eastern District of Louisiana

(December 2, 1994)

Before POLITZ, Chief Judge, DUHÉ and BARKSDALE, Circuit Judges.

POLITZ, Chief Judge:

Gerald J. Daigle, Jr., George C. Cavin, and John E. Seago

appeal their convictions for conspiracy to defraud the Louisiana

insurance regulators and related substantive offenses. For the

reasons assigned we reverse in part and vacate and remand in part.

Background

In 1987 David B. Ridgeway, an insurance executive, established
his own company, Alliance Casualty and Reinsurance Company. Under

Louisiana law, Alliance needed $1.5 million in assets to receive an

operating license from the Commissioner of Insurance. Unable to

raise the funds, Ridgeway persuaded Dieter Hugel, a friend and

investor, to loan him $1 million on a short-term basis. Ridgeway

did not report to the Commissioner that two-thirds of the company's

capital was merely a short-term loan. Nor did he reveal that a

$50,000 investment by Glynn Pittman, another friend, was also a

loan or that Pittman had invested $35,000 on behalf of Larry

Stoulig, a principal in Alliance's outside auditor, Stoulig &

Buckley.

Ridgeway's efforts were assisted professionally by Daigle, an

associate soon to become partner at a prestigious New Orleans law

firm. As Alliance's outside counsel, Daigle prepared the private

placement memorandum used to attract investors and the application

for a Certificate of Authority from the Louisiana Insurance

Commissioner.

Alliance's certification application was filed but Sherman A.

Bernard, then Louisiana Insurance Commissioner, took no action

until Ridgeway paid him $10,000. The certificate issued on

March 9, 1988 and Alliance commenced business.

From the start, solvency was a problem. Louisiana law

required domestic insurers to maintain $1.5 million in policyholder

surplus; otherwise they would be subject to regulatory action, up

to and including liquidation.1 In addition, Alliance was required

1
See La. R.S. 22:733.

2
to maintain a ratio of net premiums to surplus that did not exceed

3-to-1. To replace the $1 million repaid to Hugel, acting through

Alliance's holding company, Alliance Management Group,2 Ridgeway

entered into a stock rental transaction. In exchange for monthly

payments of $10,000, AMG received a term assignment of 500,000

shares of Chaparral Mining Company stock with a purported value of

$1 million. AMG in turn transferred the stock to Alliance which

reported it to the Commissioner as an unencumbered asset. Daigle

reviewed the documentation and accompanied Ridgeway to the closing

of the transaction in Denver. According to Ridgeway, the two joked

on the return trip about the purported value of the stock; neither

believed it was really worth $1 million.3 The transaction was

closed in January 1989 but the agreement was dated December 15,

1988 and reported on Alliance's 1988 annual statement.

Despite the infusion of the stock, Alliance showed only a

$489,662 surplus on its June 30, 1989 quarterly report. The report

caught the attention of the Commissioner's office, which threatened

to place Alliance in administrative supervision unless it raised

$1 million in additional capital by September 30. Unable to do so,

Ridgeway used $800,000 in premium payments and a short-term loan

from Hugel to create the illusion of $1 million in new assets.

Ridgeway testified that Daigle knew the source of the funds,

2
AMG, which was owned 90 percent by Ridgeway and 10 percent by
Hugel, owned 90 percent of Alliance's common stock; Hugel owned the
remaining 10 percent. Alliance's other investors owned preferred
stock.
3
50,000 shares were ultimately sold for 50 cents per share and
the remaining shares were written off as without value.

3
advised him to proceed, and drafted a letter to lend authenticity

to the purported capital contribution.

For the 1989 annual statement a $700,000 note swap was

structured. Ridgeway obtained a $350,000 promissory note in favor

of Alliance from Coordinated Financial Planners, a company owned by

a friend, in exchange for a nominal fee and AMG's note at a

slightly higher interest rate. Daigle obtained a similar note from

Marmex International, an inactive company owned by clients, also in

exchange for a small fee. Neither CFP nor Marmex were indebted to

Alliance or AMG. The notes were reported as assets on the year-end

1989 statement, even though Wayne Ducote, designated by the

Commissioner as Alliance's informal supervisor, rejected them as

"B.S. transactions."

The 1989 annual statement also reflected as an unencumbered

asset a $1 million asset-backed bond issued by American Midwest

Capital Corporation (AMCC). In a transaction brokered by Cavin and

reviewed by Daigle, the bond was assigned to Alliance for a

three-year term in exchange for AMG's debenture and monthly

interest payments. The bond purportedly was collateralized by

$1 million in Federal National Mortgage Association securities

which in reality were purchased by AMCC on margin; the available

equity was only $158,000. In addition, Ridgeway again turned to

Hugel for another $1 million loan which, like the other loans, was

repaid immediately after the end of the reporting period.

The Commissioner disallowed the AMCC bond and the CFP and

Marmex notes, requiring Alliance to raise an additional $1 million

4
by June 30, 1990. Ridgeway could not do so. In lieu thereof, on

June 28 he obtained a $1 million check from Seago & Carmichael, a

law firm seeking defense work with Alliance. On July 2, AMG issued

a $1 million check to Seago & Carmichael. Both checks were

dishonored. Nevertheless, the check from Seago & Carmichael was

included as a $1 million asset on the June 30 quarterly report.

To dress up the 1990 annual statement, Ridgeway employed a new

stratagem which he asserted Daigle orchestrated. On December 31,

Ridgeway wrote a $3 million check on AMG's First City Bank account

for deposit to Alliance's Whitney National Bank account. At that

time the First City account had only a $100,000 balance. Ridgeway

then wrote a $3 million check on the Whitney account, which

likewise did not have sufficient funds, to buy securities through

Legg Mason, Alliance's brokerage house. On January 2, Alliance

transferred the securities back to AMG, which sold them and used

the sale proceeds to cover the December 31 check. The transaction

resulted in a Legg Mason statement showing $3 million worth of

securities on December 31, 1990. These were reported as new assets

on Alliance's year-end statement to the Commissioner.

Stoulig & Buckley uncovered the substance of the year-end

transactions during an audit and expressed its intent to issue a

letter indicating an insecure financial condition, but agreed to

defer if Ridgeway raised $3 million in real assets. Once again,

Ridgeway borrowed the money from Hugel, repaying it immediately

after the auditors finished their field work.

Ridgeway tried to repeat the year-end transaction at the close

5
of the first quarter of 1991. This time the scheme did not work;

Ridgeway's contact at Legg Mason had died and Legg Mason's head

accountant discovered that Alliance's check would not clear. Legg

Mason "unwound" the transaction but Alliance nevertheless received

a March statement showing the purchase of $3 million in securities

which Ridgeway reported as assets on the March 31 quarterly report.

Ridgeway continued to seek additional capital. In April 1991,

he submitted a package to Whitney Bank in support of his

application for a $5 million loan, containing, among other items,

Alliance's 1990 annual statement to the Commissioner. Whitney

rejected the loan application.

Ridgeway and Daigle devised another plan. In September 1991

Ridgeway executed a $6 million promissory note from AMG to

Alliance, backed by $6 million in U.S. Treasury notes purchased on

margin. Although AMG had only $600,000 in equity in the

collateral, Ridgeway reported the transaction as a $6 million asset

on the September 30, 1991 quarterly report, ignoring Daigle's

admonition to book the AMG non-equity interest as a second lien.

Alliance underwent a statutorily required examination in

October 1991, which concluded that the company had a negative

policyholder surplus of $13 million. It immediately was placed in

administrative supervision, then conservation, rehabilitation, and

ultimately, liquidation. During Alliance's brief existence,

Ridgeway received from it at least $1.5 million in salary, fringe

benefits, and personal loans.

Ridgeway, Daigle, Seago, Cavin, and others were named in a

6
22-count indictment charging conspiracy to defraud the state

regulators and Alliance policyholders, as well as various fraud

offenses. Ridgeway pleaded guilty to all counts and testified for

the government. Daigle, Seago, and Cavin, among others, proceeded

to trial on a 26-count superseding indictment. All three were

convicted of conspiracy in violation of 18 U.S.C. § 371. In

addition, Daigle was convicted of two counts of making false

representations to a bank in violation of 18 U.S.C. § 1014, two

counts of mail fraud in contravention of 18 U.S.C. § 1341, nine

counts of wire fraud in violation of 18 U.S.C. § 1343, one count of

bank fraud in violation of 18 U.S.C. § 1344, and two counts of

illegal monetary transactions in contravention of 18 U.S.C. § 1957.

Cavin was convicted of one count of mail fraud, five counts of wire

fraud, and one count of an illegal monetary transaction; Seago was

convicted of one count of mail fraud and one count of bank fraud.

Daigle was sentenced to 60 months imprisonment and ordered to pay

$50,000 in restitution, Cavin was sentenced to 42 months

imprisonment and fined $25,000, and Seago was sentenced to 12

months imprisonment and likewise fined $25,000. Daigle, Cavin, and

Seago timely appealed and the government cross-appealed Daigle's

sentence.

Analysis

1. McCarran-Ferguson Act immunity.

At the threshold Daigle invokes section 2(b) of the McCarran-

7
Ferguson Act,4 which provides:

No Act of Congress shall be construed to invalidate,
impair, or supersede any law enacted by any State for the
purpose of regulating the business of insurance, . . .
unless such Act specifically relates to the business of
insurance . . . .

Daigle contends that the Act strips this court of subject matter

jurisdiction. We agree with our colleagues of the Second Circuit

in their holding in Dexter v. Equitable Life Assurance Society of

United States5 that McCarran-Ferguson does not erect a

jurisdictional bar. This was not raised in the trial court; we

review only for plain error.6 We find the contention meritless.

Section 2(b) of the Act applies only to those federal statutes

that conflict with state insurance regulation.7 There is no such

conflict herein. The government charges the defendants with

defrauding Alliance policyholders and the state regulators. Its

interest in the fraud prosecution is completely compatible with the

state's regulatory interests. Daigle argues that there is a

conflict because he is being prosecuted for conduct permitted by

the Louisiana Commissioner of Insurance. The argument is not

persuasive. His defense to the fraud charges does not trigger the

preemption provisions of McCarran-Ferguson.

4
15 U.S.C. § 1012(b).
5
527 F.2d 233 (2d Cir. 1975).
6
United States v. Calverley, _____ F.3d _____ (en banc), slip
op. 475 (5th Cir. Oct. 20, 1994).
7
See U.S. Department of Treasury v. Fabe, _____ U.S. _____,
113 S.Ct. 2202, 124 L.Ed.2d 449 (1993) (distinguishing SEC v.
National Securities, Inc., 393 U.S. 453 (1969)).

8
 2. Sufficiency of the evidence.

All three appellants contend that the evidence was

insufficient to support their convictions. In reviewing a

sufficiency challenge we may not reweigh the evidence or impose our

preferred interpretation. Rather, we must view the evidence and

all inferences therefrom in the light most favorable to the verdict

and must affirm if a rational jury could have found that the

government proved each element of the offense beyond a reasonable

doubt. On the other hand, if the evidence gives equal or nearly

equal circumstantial support to a finding of guilty and a finding

of not guilty, reversal is in order.8 Although the evidence in

this case is subject to differing interpretations, we are not

prepared to say that it is insufficient as a matter of law to

support the convictions of Daigle and Cavin, except for those on

the illegal monetary transaction counts as discussed herein. The

evidence is not sufficient, however, to support Seago's

convictions.

a. Daigle.

To establish a section 371 conspiracy, the government must

prove that the defendant voluntarily joined at least one other

person in an agreement to commit a federal crime and that one or

more of the conspirators committed an overt act in furtherance of

the agreement.9 Mail and wire fraud consist of use of the mail or

8
United States v. Mackay, 33 F.3d 489 (5th Cir. 1994).
9
United States v. Loney, 959 F.2d 1332 (5th Cir. 1992); United
States v. Yamin, 868 F.2d 130 (5th Cir.), cert. denied, 492 U.S.
924 (1989).

9
wires, respectively, in furtherance of a scheme to defraud.10 Bank

fraud involves a scheme to defraud or to obtain money from a

federal financial institution by false or fraudulent pretenses.11

There is evidence that Daigle conspired to defraud the state

regulators and Alliance policyholders by use of the mails and wire

communications and through bank fraud. According to Ridgeway,

Daigle participated in: reporting of Hugel's $1 million loan as

start-up capital and of subsequent short-term loans as capital

contributions; listing Chaparral stock as an asset; representing

policy premiums as a capital contribution during the third quarter

of 1989; and including on the 1989 annual statement the CFP and

Marmex notes and the $3 million in securities purchased with kited

checks and owned for little more than one day. From this the jury

could have inferred that Daigle conspired with Ridgeway to inflate

Alliance's assets on the reports to the Commissioner.

Daigle's principal defense is that the government failed to

prove fraudulent intent, an element of both the conspiracy and

substantive charges. Several of the substantive counts were based

on the Chaparral stock and AMCC bond transactions. Daigle

maintains that the status of these so-called "rental assets" was

unclear at the time and therefore he lacked fraudulent intent in

assisting Ridgeway to enter into the transactions. The crux of the

10
United States v. Hatch, 926 F.2d 387 (5th Cir.), cert.
denied, 111 S.Ct. 2239 and 112 S.Ct. 126 (1991); United States v.
Dula, 989 F.2d 772 (5th Cir.), cert. denied, 114 S.Ct. 172 (1993).
11
United States v. Farmigoni, 934 F.2d 63 (5th Cir. 1991),
cert. denied, 112 S.Ct. 1160 (1992).

10
charged fraud was the representation in financial reports to the

Commissioner that Alliance had unencumbered ownership of the assets

when in fact it only had defeasible temporary interests.12 There

was evidence connecting Daigle to the financial statements,

indicating that he intended the misrepresentations. Ridgeway

testified that Daigle had free access to Alliance's financial

statements and generally reviewed them with Alliance comptroller

Nicki Savoie before filing. Savoie testified that he discussed

with Daigle how to report the Chaparral stock on the 1988 annual

report, that he voiced concerns to Daigle about reported assets

"going in and out of the insurance company," and that Daigle

instructed him to "make entries and prepare financial reports that

went against my better judgment."

Daigle contends that the decisive issue for purposes of the

reports was whether the securities were at risk, that is, available

to the Commissioner for payment of claims in the event of

regulatory action. There was evidence that they were not and that

Daigle knew it. Frank O'Bryan, a principal in the Chaparral

transaction, testified to an understanding at the closing, which

Daigle attended, that "the stock would be initially frozen so that

it couldn't be just immediately grabbed." A provision in the

acquisition document authorized Chaparral's stockholders to take

12
According to Daigle and Cavin, the reports were accurate in
that AMG retained the liability of the note and the rental payments
and passed only the assets to Alliance. That argument is beside
the point. AMG did not have full ownership. It is axiomatic that
AMG could not give Alliance greater rights in the assets than AMG
itself had. E.g. Armstrong v. Ellerslie Planting Co., 146 La. 559,
83 So. 830 (1920).

11
any action necessary to protect their interests in the event of

Alliance's insolvency. Similarly, the AMCC rental agreement

allowed AMCC to demand immediate return of the asset upon

Alliance's insolvency, absent a prior written directive from the

Commissioner.

With respect to the AMCC bond, Daigle further contends that he

could not have intended to defraud the Commissioner because he

reported the details of the transaction to Ducote in February 1990,

before the filing of the 1989 annual report. Ducote determined

that the transaction was a "phony asset scheme" and prohibited its

use on the March 31, 1990 report. But according to Daigle, Ducote

accepted the bond on the 1989 statement. The evidence is subject

to a different interpretation: Ducote did not approve the

inclusion of the bond on the 1989 report, as he testified, but

effectively was preempted by the late date of the disclosure. As

he wrote to Ridgeway,

. . . I understand the reason for your not seeking my
approval for your two December capital vehicles[:] you
did know that I would not approve either but did not want
to publish your December 31st statement without these
"assets." This action should not be repeated for your
first quarter 1990 statement.13

The second "December capital vehicle" to which Ducote referred

were the $350,000 promissory notes from Marmex and CFP. As with

the AMCC bond, Daigle insists that he could not have intended to

defraud the Commissioner because he revealed the mechanics of the

13
Indeed, after meeting with Ridgeway and Daigle in November
1989, Ducote wrote the Deputy Commissioner that Ridgeway "is well
aware that third party loans, rent-an-asset schemes and other
convoluted, non-asset contributions are unacceptable."

12
transaction to Ducote. Ducote, however, testified that Daigle did

not inform him that there was no obligation underlying the CFP and

Marmex notes. Moreover, Johan Jullens and Vilma Lecler, the owners

of Marmex, testified that Daigle did not explain why he wanted to

use the name of their company. According to Jullens, he did not

realize the import of the note that he had signed until the FBI

confronted him with it, whereupon he rushed to Daigle's office in

great distress.

We conclude that the evidence is not sufficient, however, to

support a conviction on either of the two illegal monetary

transaction counts, counts 23 and 24. The indictment charges the

use of criminally derived funds to make rental payments for the

Chaparral stock and the AMCC bond. The government presented no

evidence that the rental payments were proceeds of criminal

activity, an essential element of the offense.14 Arguably, the

inflation of Alliance's financial statements with the rental assets

forestalled regulatory action, thereby allowing Alliance to write

new business from which the rental payments possibly were derived.15

Such speculation is no substitute for evidence.

b. Cavin.

Cavin's convictions are based on the AMCC bond transaction.

14
See United States v. Johnson, 971 F.2d 562 (10th Cir. 1992)
(Congress intended section 1957 to punish trafficking in the
proceeds of illicit activities).
15
That argument is particularly tenuous with respect to count
24, involving the AMCC bond. The transaction did not forestall
regulatory action; Ducote rejected the bond even before it appeared
on a financial report.

13
The government alleges that he conspired with Ridgeway and Daigle

to defraud the insurance regulators by brokering the transaction,

committing mail and wire fraud in the course of his activities.

Like Daigle, Cavin contends that the admissibility of rental assets

was unsettled at the time of the transaction and therefore he

cannot be found to have harbored fraudulent intent. Because Cavin

was in the business of brokering such transactions, the jury could

have inferred that he knew that the AMCC bond would be

misrepresented on the financial reports to the Commissioner as

property owned outright by Alliance. In light of the rental

agreement provision allowing AMCC to demand immediate return of the

bond, the jury also could have inferred that Cavin knew that the

asset was not truly at risk. Evidence that John Peterson, the

stockbroker who handled AMCC's FNMA purchases, was a co-owner of

Organization of Strategic Services, the company through which Cavin

conducted the AMCC transaction, supports the inference that

Peterson shared with Cavin his knowledge that the FNMA securities

had been purchased on margin. We cannot say that the evidence was

insufficient as a matter of law to support conspiracy and mail and

wire fraud convictions. For the reasons discussed above, however,

we find insufficient evidence to support the conviction on

count 24.

c. Seago.

Seago's convictions are based on the $1 million check that his

law firm wrote to AMG at the end of the June 30, 1990 reporting

period. The government charged Seago with an attempted check kite.

14
To prove its case it had to establish that Seago knowingly

participated, or for purposes of the conspiracy count agreed to

participate, in a scheme to trick a bank into inflating bank

balances, thereby temporarily placing the bank's funds at the

disposal of the account holder.16 We conclude that the government

failed to present sufficient evidence of criminal intent.

The government's evidence was essentially documentary: the

Seago & Carmichael law firm check to AMG, written on June 28; the

fund transfers in and out of the Alliance account on June 29 and

July 2, respectively; AMG's return check to Seago & Carmichael

written on July 2; and bank statements showing that neither account

had sufficient funds to cover the $1 million checks apart from the

reciprocal checks. Ridgeway explained the transaction as a

short-term loan. Seago testified that he had agreed to allow

Ridgeway to use his client account to funnel $1 million of his own

money into AMG; he was surprised when Ridgeway asked for the Seago

& Carmichael check before tendering his own but acceded in the

belief that Ridgeway's check would be forthcoming immediately. In

support of this version of events, Seago's banker confirmed that

after writing the overdraft Seago promptly telephoned him to advise

of the situation. Viewing the evidence as a whole, we are not

persuaded that a rational jury could have found beyond a reasonable

doubt that Seago intended a check kite. To the contrary, the

evidence reflects that Seago did nothing more than write a bad

16
United States v. Frydenlund, 990 F.2d 822 (5th Cir.), cert.
denied, 114 S.Ct. 192 and 114 S.Ct. 337 (1993).

15
check to accommodate a prospective client. That does not

constitute bank fraud.17 Further, there is no evidence linking

Seago to the inclusion of the $1 million check as an asset on the

quarterly report to the Commissioner, required to sustain the mail

fraud conviction. Accordingly, the convictions on both the

conspiracy and substantive counts are reversed.

3. Exclusion of Steeg testimony.

The linchpin of Daigle's defense was that the government

failed to prove fraudulent intent. As evidence of good faith

Daigle offered the testimony of Moise S. Steeg, Jr., a veteran

commercial lawyer, about the ethical constraints under which

attorneys operate in the regulatory arena and about the substance

of rental asset transactions. The district court excluded this

testimony. In so doing, the court abused its discretion and

committed reversible error.18

One of the basic tenets of our adversarial legal system is

that the lawyer owes the client loyalty and zealous

representation.19 That duty includes advocating positions which the

lawyer in good faith believes have an arguable basis despite

contrary authority.20 It also includes confidentiality: as a

17
United States v. Orr, 932 F.2d 330 (4th Cir. 1991).
18
Cf. United States v. Alexander, 816 F.2d 164 (5th Cir. 1987)
(reversing conviction because of exclusion of expert testimony
crucial to the defense).
19
C. Wolfram, Model Legal Ethics, § 10.3 at 578 (1986).
20
Louisiana State Bar Articles of Incorporation, Art. 16, Rules
of Professional Conduct, Rule 3.1, La.R.S. foll. 37:219
(hereinafter Rule . . ., Louisiana Rules of Professional Conduct).

16
general rule, the lawyer may not divulge client confidences except

in very limited instances.21 These ethical obligations are

enforceable; a lawyer violating them may find himself before the

state Supreme Court facing sanctions up to and including

disbarment.

On occasion a lawyer's responsibility to the client collides

with other rules of law. A lawyer may discover that his client is

using his services to perpetrate a fraud. An attorney is not above

the law; like everyone else, he may not assist in the perpetration

of a criminal offense.22 If he withdraws from representation

without blowing the whistle on his client, has he rectified the

problem? If he withdraws "noisily," does he violate the duty of

confidentiality? In a controversial ethics opinion, the ABA

experts concluded that an attorney in such a situation must

withdraw from representation and may disaffirm work products used

in furtherance of the fraud, even if doing so reveals client

confidences.23 On the other hand, if the fraud has terminated,

withdrawal is optional and the lawyer may not blow the whistle.

Sometimes the interplay of conflicting duties is even more

21
Rule 1.6, Louisiana Rules of Professional Conduct.
22
Rule 1.2(c), Louisiana Rules of Professional Conduct;
1 G. Hazard, Jr. and W. Hodes, The Law of Lawyering, § 1.2:502 at
48 (1993 Supp.).
23
ABA Formal Opinion 92-366 (Aug. 8, 1992). The ABA opinion
justifies the revelation of client confidences as necessary to
rectify the fraud. Hazard and Hodes argue that a better
justification is preemptive self-defense. 1 Hazard and Hodes,
§ 1.6:315 at 192.

17
complex. Under what circumstances, for example, is a lawyer who

represents a client in reporting to a regulatory agency, as here,

obliged to divulge potentially damaging facts? Under what

circumstances is he obliged to maintain silence? The black-letter

rule is that the lawyer must disclose a material fact when

disclosure is necessary to avoid assisting a criminal or fraudulent

act by a client, unless disclosure is prohibited by the rule

against revealing client confidences.24 Because most such

disclosures would consist of client confidences, it would seem that

disclosure is prohibited, leaving the lawyer in the position of an

accomplice. But that is not the rule; a lawyer may not commit a

fraud.25 The parameters of his obligations, however, depend on the

circumstances. How active a role does the lawyer play in the

reporting process: is he a background advisor or the spokesperson?

Is the context such that the agency likely would be misled without

disclosure of the damaging fact? Would the omission mislead

because of a statement by the lawyer or because of an oversight by

the agency? Finally, what if the lawyer reasonably believes that

the legal significance of the undisclosed information is such that

the agency's reporting requirements do not call for disclosure, but

the lawyer suspects that the agency would disagree? One authority

holds that disclosure is not required.26 If disclosure is not

24
Rule 4.1(b), Louisiana Rules of Professional Conduct.
25
ABA Formal Opinion 93-375 (Aug. 6, 1993); see also 2 Hazard
& Hodes, § 4.1:303 at 721.
26
ABA Ethical Opinion 93-375.

18
required, arguably it is forbidden.

These are some of the complex considerations facing a lawyer

whose client is using or has used his services to accomplish a

fraud. To the extent that they guide his conduct, they are

directly relevant to his intent. We therefore join our Eleventh

Circuit colleagues in holding that a lawyer accused of

participating in his client's fraud is entitled to present evidence

of his professional, including ethical, responsibilities, and the

manner in which they influenced him.27 Exclusion of such evidence

prevents the lawyer from effectively presenting his defense.

Similarly relevant to Daigle's intent is evidence of the state

of the law with respect to the transactions for which he was

convicted. Sitting en banc in United States v. Garber28 we reversed

a tax evasion conviction because of the exclusion of expert

testimony about whether the proceeds from the sale of blood plasma

was taxable income. We stated:

When the taxability of unreported income is problematical
as a matter of law, the unresolved nature of the law is
relevant to show that [the] defendant may not have been
aware of a tax liability or may have simply made an error
in judgment. . . . By disallowing [expert] testimony
that a recognized theory of tax law supports [the
defendant's] feelings, the court deprived the defendant
of evidence showing her state of mind to be reasonable.29

Expert testimony may be particularly appropriate when specialized

areas of law, such as the insurance and financial matters relevant

27
United States v. Kelly, 888 F.2d 732 (11th Cir. 1989).
28
607 F.2d 92 (5th Cir. 1979) (en banc).
29
607 F.2d at 98-99.

19
herein, are at issue.30 In the case at bar, Daigle sought to

present the testimony of a seasoned commercial lawyer that

ostensibly would have supported his interpretation of the Chaparral

and AMCC transactions, thereby bolstering his contention that he

believed the assets to be acceptable. By disallowing that

testimony the district court deprived Daigle of an opportunity to

present critical evidence that he lacked fraudulent intent in

assisting with the transactions. We underscore: Steeg's testimony

would not be admissible for the purpose of proving what the law is;

the declaration of controlling law must come from the court.

Rather, it would be admissible as it relates to Daigle's

understanding and resulting state of mind.

4. Jury instructions.

The jury instructions also undermined Daigle's good faith

defense. We review a challenge to jury instructions to determine

whether the instructions correctly state the law and cover the

issues presented by the case.31 In several respects the jury charge

as given herein did not satisfy this standard, requiring reversal

of the convictions of Daigle and Cavin.

a. Good faith.

The district court charged the jury that it "may" acquit the

defendants if it found that they acted in good faith. A good faith

30
See Peckham v. Continental Cas. Ins. Co., 895 F.2d 830 (1st
Cir. 1990).
31
United States v. Faulkner, 17 F.3d 745 (5th Cir), petition
for cert. filed, 63 USLW 3093 (July 27, 1994) (No. 94-171 and
No. 94-5557-CFY) and (July 28, 1994) (No. 94-5417), and cert.
denied, 115 S.Ct. 193 (1994).

20
defense is "the affirmative converse of the government's burden of

proving . . . intent to commit a crime."32 Acquittal is not

optional upon a finding of good faith, as the court erroneously

charged; it is mandatory because a finding of good faith precludes

a finding of fraudulent intent. The implication of the charge as

given was that the jury could convict without finding fraudulent

intent.

b. Deliberate ignorance.

The district court instructed the jury that deliberate

ignorance sufficed to prove knowledge.33 Daigle maintains that the

evidence does not support such a charge. We do not agree. A

deliberate ignorance instruction is appropriate where the evidence

shows (1) subjective awareness of a high probability of the

existence of illegal conduct, and (2) purposeful contrivance to

avoid learning of the illegal conduct.34 Daigle repeatedly invoked

32
United States v. Kimmel, 777 F.2d 290, 293 (5th Cir. 1985),
cert. denied, 476 U.S. 1104 (1986).
33
The court instructed that:

The element of knowledge may be satisfied by inferences
drawn from proof that a defendant deliberately closed his
eyes to what otherwise would have been obvious to him.
A finding beyond a reasonable doubt of a conscious
purpose to avoid enlightenment would permit an inference
of knowledge.

It is entirely up to you as to whether you find any
deliberate closing of the eyes, and the inferences to be
drawn from any such evidence. A showing of nothing more
than negligence or mistake is not sufficient to support
a finding of willfulness or knowledge.
34
United States v. Investment Enterprises, Inc., 10 F.3d 263
(5th Cir. 1993).

21
ignorance as a defense; he claimed that he did not know -- and did

not inquire into -- critical details that rendered Ridgeway's

transactions illegal. The court did not err in giving this charge

as relates to Daigle. We conclude otherwise as relates to Cavin.

The record is devoid of evidence of purposeful contrivance by Cavin

to avoid learning the truth and the charge should not have been

given as relates to him.

c. Attorney's duty of confidentiality.

Daigle contends that he was entitled to an instruction

concerning an attorney's duty of confidentiality. The professional

responsibilities of attorneys are relevant in instances as here

presented, and a proper jury charge detailing those

responsibilities should have been given.

d. Multiple conspiracies.

Finally, Daigle and Cavin object to the district court's

failure to give a multiple conspiracy instruction. A multiple

conspiracy charge instructs the jury to acquit if it finds that the

defendant was not a member of the indicted conspiracy but rather

was involved in another conspiracy. Upon request, a defendant is

entitled to such an instruction if his theory of multiple

conspiracies has a legal basis and is supported by sufficient

evidence to raise a factual question for the jury.35 Apart from the

charged conspiracy to defraud the state regulators and the Alliance

35
United States v. Greer, 939 F.2d 1076 (5th Cir. 1991),
opinion modified on other grounds and reinstated in part by 968
F.2d 433 (5th Cir. 1992) (en banc), cert. denied, 113 S.Ct. 1390
(1993).

22
policyholders by inflating Alliance's assets, Daigle and Cavin

contend that the evidence revealed a second conspiracy: a scheme

by the principals of AMCC and stockbroker Peterson to defraud

Alliance by misrepresenting that the FNMA securities securing the

AMCC bond were unencumbered when in fact they were purchased on

margin. That evidence did not entitle Daigle to a multiple

conspiracy instruction because it did not implicate him in the

uncharged conspiracy.36

Cavin, on the other hand, was entitled to a multiple

conspiracy instruction. The jury could have found that Cavin knew

that the FNMA securities were purchased on the margin and therefore

participated in the uncharged conspiracy to defraud Alliance, but

was not responsible for the manner in which the AMCC bond was

reported on Alliance's financial statements and therefore did not

participate in the charged conspiracy. In that event, absent a

multiple conspiracy instruction, Cavin could have been convicted of

a conspiracy with which he was not charged. As we held on

analogous facts in United States v. Stowell,37 the failure to give

a multiple conspiracy instruction was reversible error.

36
Cf. Greer, 939 F.2d at 1088 (a multiple conspiracy
instruction is generally required where the indictment charges
several defendants with one overall conspiracy, but the proof at
trial indicates that a jury could reasonably conclude that some of
the defendants were only involved in separate conspiracies
unrelated to the overall conspiracy charge in the indictment);
United States v. Toro, 840 F.2d 1221 (5th Cir. 1988) (multiple
conspiracy instruction is not required where there was no serious
doubt of the defendant's participation in the charged conspiracy).
37
947 F.2d 1251 (5th Cir. 1991), on denial of petition for
rehearing, 953 F.2d 188 (5th Cir.), cert. denied, 112 S.Ct. 1269
and 113 S.Ct. 292 (1992).

23
 5. Admission of evidence against Cavin.

Cavin contests the admission of three pieces of evidence.

First, he challenges as hearsay certain testimony that the FNMA

securities backing the AMCC bond were purchased on the margin. The

error, if any, was harmless, for the next witness testified without

objection to essentially the same matters. Second, Cavin

characterizes as inadmissible hearsay a letter from Peterson to the

principals of AMCC about the substitution of securities. He is

incorrect. The document was offered not for the truth of the

matters asserted but to establish a foundation for later showing

that it was a forgery. The document was not hearsay and was

properly admitted.38 Third, Cavin challenges the admission under

Fed.R.Evid. 404(b) of evidence of a prior stock rental transaction

involving another insurance company. The district court properly

found that the transaction was relevant to Cavin's intent but did

not place on the record an assessment of its probative value

compared to its prejudicial effect. On retrial the court should

complete the balance of the Fed.R.Evid. 403 factors and spread its

findings on the record.39 Cavin further insists that the government

should be required to inform the jury that he was acquitted of

criminal charges in connection with the prior transaction. The

government need do so only if there is evidence introduced that

Cavin was charged.

38
Anderson v. United States, 417 U.S. 211 (1974); United States
v. Adkins, 741 F.2d 744 (5th Cir. 1984), cert. denied, 471 U.S.
1053 (1985).
39
See United States v. Elwood, 993 F.2d 1146 (5th Cir. 1993).

24
 6. Severance.

Cavin complains of the denial of his motion for severance. We

perceive no error. Persons who are charged together generally

should be tried together, particularly where they are charged with

the same conspiracy. Severance is in order only when a defendant

suffers compelling prejudice against which the trial court cannot

protect.40 Cavin was charged with the same conspiracy as his

codefendants and the same evidence was involved. That he was

involved with only one of the multiple transactions undertaken in

the course of the conspiracy made it easy for the jury to

compartmentalize the evidence against him. Through cautionary

instructions the trial court minimized the possibility of spillover

effect and the verdicts, convicting one defendant on counts of

which another was acquitted and vise versa, reflect that the jury

was able to follow those instructions. There was no abuse of

discretion in the denial of severance.

Conclusion

To summarize, we are not persuaded that, as a matter of law,

the evidence is insufficient to support the convictions of Daigle

and Cavin except as to counts 23 and 24 for Daigle and count 24 for

Cavin. The convictions on those counts are REVERSED. In light of

the above discussed erroneous evidentiary rulings and jury

instructions, however, we VACATE the other convictions of Daigle

and Cavin and REMAND for a new trial on the remaining counts,

consistent herewith. Concluding that there is insufficient

40
United States v. McCord, 33 F.3d 1434 (5th Cir. 1994).

25
evidence to sustain Seago's convictions we REVERSE same and REMAND

for entry of a judgment of acquittal.

26